https://www.businesstopia.net/economics/micro/concept-isocost-line

2. What is Isocost Line
• An isocost line is a graphical representation of
various combinations of two factors (labor and
capital) which the firm can afford or purchase with a
given amount of money or total outlay. It is an
important tool for determining what combination of
factor-inputs the firm will choose for production
process.

3. Mathematically, an isocost line can be expressed as
•C = w L + r K
Where,
C = cost of production
w = price of labor or wages
L = units of labor
r = price of capital or interest rate
K =units of capital

5. • In the given diagram, x-axis represents units of labor and y-axis represents units of capital.
Therefore, OB in the figure represents 50 units of labor and OA represents 40 units of capital.
• If we join points A and B, we get isocost line for Rs. 200. And, the straight line which joins
points A and B will pass through all combinations of labor and capital which the firm can buy
with the outlay of Rs 200, if it spends the entire sum on them at the given prices.
• This way, an isocost line is also known as price line or outlay line. It is a counterpart of budget
line of indifference curve analysis.
• The slope of the isocost line is equal to the ratio of price of factor-inputs. Mathematically,
slope of an isocost line is expressed as
• And this slope remains the same throughout the isocost line.

6. Shift in Isocost Line
• An isocost line may shift due to two reasons. They are
• Change in total outlay to be made by the firm
• Change in price of a factor-input

7. Change in total outlay to be made by the
firm
• When the firm decides to increase the total money to be spent on
purchase of inputs while prices of the inputs remain the same, the
producer becomes able to afford such combinations of inputs
which were initially unattainable to him. This causes isocost line to
shift to a new position higher to the initial line

9. • In the given figure, AB is the initial isocost line. When the firm increased its total
outlay, the isocost line shifted rightwards to a higher position A’B’ where the
producer could purchase combinations of inputs with higher units of labor and
capital. Likewise, if the firm reduces its total outlay, the isocost line will shift
leftwards to A”B”.
• Whether the isocost line shifts toward the left or toward the right, it will always
remain parallel to the original line. It is because the slope of an isocost line is
calculated as
• Since we assume that no changes are made in the prices of either of the inputs,
the slope remain the same for all budget line at any given outlay. And, any lines
with same slope are parallel to each other.

10. Change in price of a factor-input
• When price of factor-input changes, the isocost line swings or
rotates. The direction in which the isocost line will swing depends
upon the factor whose price has changed

11. shift in isocost line due to change in
price of labor

12. •Let us suppose that a firm has total outlay of Rs. 200
and AB is initial isocost line. Let us also suppose that
the price of labor was decreased by certain amount, as
a result of which the producer became able to
purchase more units of labor at the same outlay.
However, the producer can’t increase purchasing units
of capital as price of capital is constant. Therefore,
the position of price line is changed in the x-axis but
unchanged in y-axis.
•Simply, decrease in price of labor causes anti-
clockwise rotation and increase in price of labor
causes clockwise rotation.

13. shift in isocost line due to change in
price of capital

14. • Once again, let us assume that a firm has total outlay of Rs. 200 but this time let
us suppose that the price of capital has changed and not of labor.
• In this case, the producer will be able to buy more units of capital at same outlay
but won’t be able to increase the purchasing units of labor. As a result, the
isocost line shifts its position in y-axis and not in x-axis.
• In the diagram, we can see that isocost line AB shifts to new position A’B as a
result of decrease in price of capital. Likewise, the line shifts to A”B as a result
of increase in price of capital.
• In other words, decrease in price of capital causes clockwise shift in isocost line
and increase in price of capital causes anti-clockwise shift.